Why we can't confirm the pollution haven hypothesis: A model of carbon leakage with agglomeration
Year: 2012
Type: report
Abstract: The literature on carbon leakage has not yet benefitted from many of the insights of the 'New Economic Geography' (NEG). Most studies assume both an absence of agglomeration forces and that factors do not move interregionally. This paper develops a 2-region NEG model with factor mobility to study the impact of regionally-di§erentiated environmental regulation on the location of polluting firms. There are three main results: (i) trade liberalisation can reduce firms incentives to relocate in response to a regulatory disadvantage; this arises because trade liberalisation increases the agglomeration forces attracting firms to a given location, and may explain why the pollution haven hypothesis (PHH), which is a common prediction of standard trade models of environmental regulation, has been so difficult to detect empirically; (ii) unilaterally tightening environmental regulation by one region may increase global pollution; and (iii) if industry is dispersed between regions, individual firms respond to higher (lower) relative domestic pollution taxes by polluting more (less).
Author: John Feddersen
Institution: University of Oxford
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1543671874